The Political Economy of Liberalization and Regulation: Trade Policy for the New Era

Atkinson, Glen, Journal of Economic Issues

The emerging global economy is a source of both great promise and anxiety. Tariffs and quotas have been reduced to historically low levels through various negotiating rounds sponsored by the General Agreement on Tariffs and Trade (GATT). As these traditional barriers to trade became less significant, others became more apparent. Many of these barriers are about social and cultural differences in the regulation of production and legitimacy of specific market actions. David Vogel wrote:

The logic of trade liberalization has influenced governments to expand the scope of trade agreements beyond distinct and overtly trade controls such as tariffs and quotas to encompass a wide variety of regulatory policies, especially as the former have declined and the latter have grown in importance. Accordingly, trade agreements and negotiations are subjecting a growing number of policies toward business that were formerly decided exclusively by national or local governments to international scrutiny and coordination. By undermining national regulatory sovereignty, globalization has blurred the distinction between trade policy, and health, safety, and environmental regulation [Vogel 1997, 5].

This tension between market liberalization and transfer of regulatory authority to supranational institutions is being experienced as a consequence of both regional integration and integration of the larger global economy. Loukas Tsoukalis made the following observation with respect to the creation of the single market in the European Union:

At least in some cases, the creation of the internal market will, inevitably, involve the adoption of a new regulatory framework at the EC level and, therefore, the transfer of powers to Community institutions. There will be more market in the new economic order, but also more European state; and the trade-off between the two will be determined by a combination of economic and political factors, both internal and external to the EC. This is what we may call the political economy of liberalization and regulation [Tsoukalis 1993, 100].

Those who see globalization as a promising prospect regard the demise of national regulatory institutions as an opportunity to take full advantage of modern technology with few governmental constraints. Those who feel threatened by globalization fear that the loss of national regulatory authority will lead to standards set at the lowest level. The controversy surrounding the level of protection of national, regional, or global standards leads to an empirical question as well as a call for a policy framework to determine whose interest should be protected by the new regulatory apparatus. What has been, and will be, the effect of the replacement of national standards requires that we monitor the effects on different interests such as labor, capital, environmental resources, consumers, and capital owners.

The statement by Tsoukalis that there will be both more market and more state in the new economic order is a useful starting point to understand these effects. Instead of the global economy leading to a withering of the state, the locus of state power will be shifted, and it is critical that this shift be monitored and understood. The state creates property rights, and property is the most powerful form of market regulation. In order to be very clear about that proposition, let me put it another way. Many people seem to view property and markets on one hand, and regulations on the other as the antithesis of each other. It is a fundamental proposition of this paper that property rights are state-sanctioned regulations to determine market behavior. All too often people speak about eliminating regulations so that the market can work. How we get more market is by having a state of sufficient strength and legitimacy to create new property rights under evolving technological and social conditions such as the emergence of the global economy. One cannot be for property rights and against government regulation because a state-sanctioned property right for one person creates a state-enforced duty for others to respect that right. …

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